(Updates at 1110 GMT)

By Harry Robertson

LONDON, Oct 1 (Reuters) - Euro zone bond yields dropped

on Tuesday as data showed inflation in the bloc fell below the

European Central Bank's 2% target in September, and comments

from ECB officials bolstered bets on an October rate cut.

Data on Tuesday showed euro zone inflation fell to 1.8%

year-on-year in September - below the 2% level for the first

time since mid-2021 - from 2.2% in August.

Germany's 10-year bond yield, the benchmark for

the euro zone bloc, fell 8 basis points (bps) to 2.052%, its

lowest since January. Yields move inversely to prices.

"It's a big change that has been taking place over the past

few days, over the past week, when it comes to interest rate

expectations," said Jussi Hiljanen, head of European rates

strategy at lender SEB.

"Basically an October rate cut has been baked into the

pricing. That has been having an impact on yields."

Traders in money markets on Tuesday saw a roughly 85% chance

of a 25 bp cut from the ECB in October, up from 75% on Monday

and 45% a week ago. The ECB cut rates by 25 bps in June and

again in September, taking them to 3.5%.

Italy's 10-year yield fell 9 bps to 3.376%,

while the gap between Italian and German yields

stood at 132 bps.

Investors were keeping an eye on a sharp drop in oil prices,

which slid 2% on a stronger supply outlook and subdued demand

despite Israel beginning a ground incursion into Lebanon.

Germany's two-year bond yield was down 3 bps at

2.04%, the lowest since December 2022.

Finnish ECB policymaker Olli Rehn said on Tuesday that the

inflation slowdown means there are now more reasons to justify

an interest rate cut at the October meeting.

President Christine Lagarde on Monday said the ECB will take

into account the drop in inflation when it meets later this

month.

France's 10-year bond yield fell 11 bps to

2.813%, helping the gap between French and German yields narrow

to 76 bps.

Emmanouil Karimalis, macro rates strategist at UBS, said a

media report that France's new government is considering tax

hikes of 15 billion to 18 billion euros ($16.71-20.06 billion)

was likely reassuring investors about French debt and helping

other longer-dated bonds.